TechnologyOne has never made a big acquisition. Now it wants to

In October, Tribal announced it would be acquired by Ellucian, a student management provider in the United States that is owned by private equity giant Blackstone, for £172 million ($320 million). Both are rivals to TechnologyOne in the provision of higher education software.

If Blackstone can bring Ellucian and Tribal together, Barrenjoey co-head of technology Josh Kannourakis says the deal would significantly increase the competition TechnologyOne faces in the UK. “But it remains too early to tell how material this could be,” he says.

Chris Savage, Bell Potter’s head of research, says the deal would in theory make Tribal a stronger competitor given it has a new, potentially better-funded owner that has experience in higher education software in the US. “But it wouldn’t be a quick fix for Ellucian as the Tribal software is old and on-premise so to upgrade it ... would still take a long time,” Savage says.

However, the deal could be in doubt after Tribal’s largest individual shareholder, Jenzabar, said it “strongly opposes” the planned takeover of the company by Ellucian. Last week, Jenzabar was buying up more of Tribal’s shares, lifting its stake to 26.45 per cent to vote against the deal.

“If the deal doesn’t progress it’s probably a better outcome for TechnologyOne as it means Tribal is still a company in distress without the means to upgrade or significantly improve its software,” Savage says. “That makes it potentially easier for TechnologyOne to win customers off Tribal without having to go and acquire them.”

Blackstone last week agreed to buy Civica, a London-headquartered public sector software maker valued around $US2.5 billion ($3.8 billion).

TechnologyOne’s shares are trading 20 per cent higher so far this year but were sold off after full-year results published last week showed margins declining as the company allocated more cash to fund growth. In the 12 months to September 30, TechnologyOne profits after tax rose 16 per cent to $102.9 million. Revenues increased 19 per cent to $441.4 million.

Its preferred measure, annual recurring revenue, grew 23 per cent to $392.9 million. The company said it’s on track to surpass $500 million on that count by 2025, a year earlier than expected, and predicted it would double in size by 2030, generating $1 billion in annual recurring revenue.

Greater risk

Chung says he is on the lookout for more deals in the UK, a market that delivered a profit of $3.7 million in the past year. Annual recurring revenue there increased 52 per cent to $26.5 million.

Bell Potter’s Savage says TechnologyOne has made successful small acquisitions over the years, but there are risks involved in taking on a substantially larger company. “A larger acquisition carries greater risk and there is also the likelihood that any acquisition will be funded with cash – and potentially debt – which would weaken the balance sheet,” he says.

For Kannourakis, TechnologyOne’s appetite for deals could be a new catalyst for the stock medium-term, which would allow it to cross-sell its software to the existing customers of any company it acquires.

“TechnologyOne’s strong cash flow generation has led to a swelling cash balance, now over $200 million, and this will continue to expand in future years given the visibility on future revenues,” he says.

“This affords them greater confidence and lower overall risk profile when approaching acquisitions now versus in the prior years.

“TechnologyOne has a solid track record of monetising more from its existing customer base, and I’m sure that would be a focus with new customers acquired through acquisition.”